Posted Jul 9, 2022, 7:20 am
Fast-rising prices for gas, food and most everything else are hitting low-income households hardest.
But the Federal Reserve’s effort to rein in inflation with higher interest rates could hurt those same households.
Inflation affecting countries across the globe this year has been
driven in part by a mismatch in supply and demand. Bottlenecks in supply
chains caused by the COVID-19 pandemic plus other events, like the
conflict in Ukraine, have interfered with the production of many goods.
Demand is higher because many people, after so much time in pandemic
lockdowns, have savings they’re eager to spend on things they couldn’t
do over the past couple of years.
Fed interest rate hikes in March, May and June
were aimed at the demand side of the issue. Higher interest rates make
it harder to borrow money or get credit, which means people will have
less money to spend.
But it also means firms will do less business and need fewer workers.
Rising unemployment always disproportionately affects Black and Latino
workers.
“There’s no way to move us out of the current situation without
driving up unemployment,” said William Darity Jr., a Duke University
professor who has long studied the racial wealth gap.
Raising interest rates won’t improve inflation overnight. In the best
of scenarios, prices will remain high through the end of the year.
The Federal Reserve Board and others hope they acted soon enough for a
so-called “soft landing,” where the negative impacts of higher interest
rates will be minimal while still slowing inflation. Their median projections show only a small increase in unemployment over the next few years with the decision to increase interest rates.
“We see restoring price stability as absolutely essential for the
country in coming years,” Federal Reserve Chairman Jerome Powell said at
a press conference. “Without price stability the economy doesn’t work
for anybody, really.”
While everyone has felt the sticker shock, inflation falls hardest on
households — disproportionately Black and Latino — who must spend most
of their income each month on essentials like food, housing and
transportation.
“I mean, there’s no good decision when it comes to equity now,” said
Karen Petrou, managing partner of Federal Financial Analytics and the
author of “Engine of Inequality: The Fed and the Future of Wealth in America.” “That’s the tragedy of the situation.”
There is a risk with higher rates that a recession follows. And it’s no secret who gets the worst of a recession.
“Particularly for the folks at the lowest end of the income
distribution, there’s no question they’re being heavily hammered by
inflation,” Darity said. “So either they’re going to be hammered by
inflation or they’re going to be harmed by a recession.”
The Fed’s role in inequality
With so many causes of economic inequality in the U.S., the role of
America’s central bank in widening the gap between the country’s richest
and poorest gets little attention.
But the Federal Reserve has made key decisions in every major
economic crisis we’ve faced over the last century that worsened this
problem, economists and economic historians say. That includes several
actions during the Great Depression.
Today, the Federal Reserve has a mandate to pursue price stability,
maximum employment and long-term moderate interest rates in the U.S.
economy. The employment mandate has its roots in the civil rights movement.
Because Black workers have long experienced high unemployment rates,
reaching full employment in the economy was viewed as essential for
equity by civil rights leaders, including Coretta Scott King, who
co-founded the National Committee for Full Employment in 1974 to pursue a
federal jobs guarantee.
The committee’s goal: Anybody who wanted work should be able to find
it — and if you couldn’t land a job in…
Read More: Low-income households on losing end of inflation fight